By Dena Aubin
NEW YORK, Nov 19 (Reuters) - U.S. companies are warming to a new trend of "pooled" debt sales that allow several issuers to sell bonds at once, despite the mixed success of the latest such offering.
Although the most recent deal on Friday was downsized nearly by half to $2.025 billion, the fact that underwriters were able to bring a multi-billion dollar sale in the current tumultous corporate bond market was a sign of significant demand, strategists said.
The "Core Investment-Grade Bond Trust" was comprised of five-year notes from 22 investment-grade companies such as Dow Chemical Co. , General Mills Inc. and the finance arms of Boeing Co. and General Motors Corp. . Lead managers Banc of America Securities and J.P. Morgan Chase had planned a $4 billion sale but trimmed it amid tepid demand.
Some kinks, like the longer time it takes to bring so many issuers and investors together, will have to be ironed out before such pooled deals flourish, corporate treasurers said.
"The expression I've heard is trying to keep all your kittens in a basket," said Jim Havert, treasurer for Occidental Petroleum Co. , which sold debt through the product. "You just have too many players for it to be simple."
Such "baskets" of securities aim to give investors a quick way to diversify while helping companies sell debt in a skittish corporate bond market.
Investors have craved more diverse holdings after seeing bonds of such prominent companies as Ford Motor Co. and AOL Time Warner Inc. plunge rapidly this year.
The downsizing of the recent deal shows that pooled corporate bond products have too many structuring requirements to be all things to all people, said Louise Purtle, U.S. credit strategist at fixed-income research service CreditSights Inc.
SMALL ISSUERS SAVE
Yet the fact that the offering garnered $2 billion in demand -- at a time when multi-billion bond sales are rare -- shows there is significant interest, she said in a report.
One problem was structuring a deal with a mix of issuers who needed financing and who appealed to a broad spectrum of investors, one corporate treasurer said. In the end, some investors passed on the offering, reasoning that they could find better value buying bonds separately.
"We believe we can replicate those products ourselves for a lot less cost," said Mark MacQueen, who helps manage $2.4 billion for Sage Advisory Services Ltd. in Austin, Texas.
Corporate bond "baskets" are distinct from collateralized bond obligations, a structured product with separate risk-ranked tiers. According to CreditSights' Purtle, they are more akin to a closed-end bond fund, as they are not actively managed and underlying bonds do not change as long as they meet criteria for the pool.
For Kimco Realty Corp. , a real estate investment trust that does not frequently sell bonds, being part of a larger, more liquid issue helped lower borrowing costs, its treasurer said.
"We actually wished it was a little larger," said Glenn G. Cohen. Kimco sold $35 million in notes in the Core Bond Product yielding 1.90 percentage points more than Treasuries. That was several basis points lower than yields it could have achieved on its own, Cohen said.
TIME LAG COSTS
A four-day time lag between launch on Tuesday and pricing on Friday was a drawback, said Occidental's treasurer Havert. U.S. Treasury prices, the benchmark for corporate borrowing costs, rose during that time, raising absolute yields the company had to pay, he said.
Because the deal size was cut, several companies returned to the market and sold debt separately to meet their funding needs for the year. Dow Chemical Co. , for example, sold $400 million of global notes on Monday, after selling about $110 million in the Core Bond product.
Company spokeswoman Cindy Newman said Dow Chemical would likely participate in such products again. "We think over time the core bond will become an investor-friendly structure," she said.